For anyone wondering just what causes fluctuation in mortgage interest rates, the answer is two-fold. While interest mortgage rates tend to go up and down due to supply and demand, as well as inflation, they also tend to be based on what is going on in the secondary mortgage market. Both loans and servicing rights are sold on the secondary mortgage market by the industry leaders Freddie Mac and Fannie Mae. They are in turn purchased by banking institutions, hedge funds, mutual funds corporations, and pension funds.
Short Term Loans
Short term loans and ARMs (Adjustable Rate Mortgages) typically stay on track with the Federal Reserve’s Federal Funds interest rate. They are also linked to LIBOR (The London Interbank Offered Rate), which is London’s version of the Fed Funds rate. Both of these interest rates are what banks charge one another in order to lend money in an expedited fashion, and they have a direct effect on when short term loan interest rates will go up, down, or stay the same.
All banks are required by regulators to keep a certain amount of cash on hand, and the higher the rate is, the more it will cost the bank when they need to borrow cash in order to satisfy this agreement. When banks are required to pay higher interest, the more likely they are to hold on to the funds they currently have, and cut back on making loans. When this happens, the banks will only lend at higher interest rates.
A lower Federal Funds rate typically will mean that banks are more apt to offer loans, and when they make the loans, the rates are lower due to the fact that they’re spending a lot less in order to obtain the funds. This in turn creates lower ARM rates, and borrowers ultimately will pay less, which in turn, contributes positively to the economy.
The Federal Reserve made an announcement on Wednesday, that it would keep current interest rates at 0.25 percent or lower in order to continue to encourage the growth of the housing market, and with any luck, the overall economy. The plan is to keep these rates low until the unemployment rate improves, provided that inflation continues to remain stable. As of December, unemployment was at 7.8 percent, and the predictions for January are that the numbers will remain unchanged.
Long Term Loans
Long term loans with 15 and 30 year fixed terms (FRMs) tend to track the interest rates of Treasury notes and bonds. These financial instruments are distributed through the U.S. government, with various maturities ranging from as short as five years to as long as thirty years.
The interest rates for long term securities tend to waver daily, due to the fact that they are sold to various investors at auction. If at any time there happens to be a high call for the notes and bonds, the rates will lower as investors’ yields descend. Since they are initially paying a higher amount for the securities, they make less money in the long run.
The exact opposite occurs when the demand is low for notes and bonds. Since investors are paying significantly less in order to purchase the notes and bonds, this in turn means that their yields are significantly higher, meaning that interest rates are higher as well.
Mortgage rates will continue to ebb and flow along with the economy, so it is always a good idea for anyone looking to obtain a home loan to check what is happening in the secondary market in order to learn what type of rates to expect when it comes time to sign on the dotted line.